The Shatzkin Files

A first at this blog: walking back the assumptions that were the basis of the last post

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In the few days since the last post here about Big Five publishers and agency pricing, I have been challenged on two specific points by comments sent privately. Both of these comments are right and therefore lead to this corrective post.

One powerful literary agent, who is inevitably informed by publishers about negotiations that affect the selling prices of ebooks (which, in turn, affect the author royalty), tells me that I have the whole motivation thing on agency backwards. It may have started six years ago as a way for publishers to control the prices of ebooks across the supply chain, so something they were “imposing” on Amazon. But that turned around. It became a way for Amazon to guarantee that they would get a full margin on all agency publishers’ ebook sales (because publishers could lower the ebook price, but the stipulated agency percentage would not be affected). So, in the recent negotiations, the big publishers had no choice about sticking with agency. Amazon insisted that they stick with agency.

The grapevine, although not this agent, also says that the original 70-30 split of revenues that agency began with has been revised in the recent contracts so that Amazon gets a wee bit more than 30 percent. I can’t verify that although, in time, agents should be able to see that picture clearly.

I have had no conversations with any friends in big houses during the recent agency negotiations. The sensitivity around those negotiations, given that they started because of the DoJ’s involvement, was very high. But now I’m being told by people in a position to know that four of the five big publishers think agency has been a big mistake. As one observer sees it, it has bled 25% out of digital sales that have been replaced by physical, resulting in an increased share for Amazon of the print portion of publishers’ businesses.

As it was put to me by one observer, agency in 2010 was a strategy; by 2015 it was a surrender.

The other challenge was a pushback against my claim that print book sales overall are rising. The commenter pointed out that more than the entire print book sales increase shown in industry stats can be accounted for by the rise in sales of adult coloring books, a category which has taken a big leap forward in the past 12 months. For one thing, it is impossible to predict with any accuracy whether or for how long those sales will sustain. But, more importantly, the sales of print that do not include adult coloring books, which have no ebook equivalents and are the good fortune of a few selected companies, are still declining.

So crediting “success” at arresting the print book sales decline to the rise in major publisher ebook prices is also a mistake.

It turns out that the real story of “agency pricing today” is that Amazon demonstrated dazzling marketplace power by keeping all the big publishers on agency terms. And all of the changes in the marketplace, including the degree by which the divison sales within Big Five houses between print and digital may have tilted in favor of print, probably work in Amazon’s favor.

This is the first time in seven years of writing this blog that I have walked back the thrust of a whole post. Ironically, the overall point to what I wrote, questioning whether agency pricing is a good thing for publishers, is correct. What I didn’t know is that most of the publishers have already figured that out but are helpless against a customer so powerful that it dictates the terms.

There is still useful insight in the original, particularly around what might or might not be worthy of anti-trust consideration. But the two core premises — that publishers forced Amazon to accept agency and that doing that had made their print sales go up — are definitely questionable.

The only thing worse than making a mistake is not correcting it.

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  • EricWelch

    For the first time ever, I have been attracted to the titles of a particular publisher and most of that is because I subscribed to Open Road Media’s Early Bird email list of specials. I now actually look through their catalog, which are reasonably priced in ebook format, are available through Scribd, and have an interesting mix of books. What’s to prevent the Big Five from doing something similar as a way of counteracting the Amazonian juggernaut and pricing their ebooks differently outside of Amazon? So far their forays into web marketing have been a disaster, but there’s no reason they couldn’t drive traffic with lower prices and better ecosystem. (Full disclosure, I’m a huge fan of Amazon’s ecosystem.)

    • The agency contracts are secret, but it wouldn’t surprise me if it is contractually difficult for publishers to price their ebooks lower for direct sales than the price Amazon sells at. Open Road can get under the radar for things like that in ways the Big Five simply can’t. The closest they’ve gotten are efforts like Harper’s BookPerk, which is a house version of BookBub. They push their promotionally-priced books. But those ebooks are available from the normal intermediaries, not direct. I believe they may have something like a million subscribers to BookPerk. It moves the needle.

  • Your high powered anonymous agent must have forgotten this little tidbit:

    “We are pleased with this new agreement as it includes specific financial incentives for Hachette to deliver lower prices, which we believe will be a great win for readers and authors alike,” said David Naggar, Vice President, Kindle.

    That seems to contradict: “(because publishers could lower the ebook price, but the stipulated agency percentage would not be affected)”.

    Ultimately, it doesn’t matter who insisted on the Agency Model, as long as it was done legally. The model makes less money for publishers, and authors, than the old wholesale model did, and it prevents Amazon from discounting ebooks. Publishers have control over pricing. If their ebooks are priced too high to attract readers, that isn’t Amazon’s fault, or the Agency Model’s fault. It’s their fault.

    Especially when Amazon went on record to say they have incentivized Hachette to deliver lower prices.

    • Who *knows *what that sentence from Naggar means? Could be many things. And there are five deals with Big Five houses that are all different.

      I agree that if the Big Five publishers price their books above what the market will bear, it is their doing, not Amazon’s.

  • Smart Debut Author

    You might want to refer your revisionist agent buddy to the following statement by Hachette’s CEO Michael Pietsch:

    “The new agreement delivers considerable benefits. It gives us full responsibility for the consumer prices of our ebooks,” Mr. Pietsch explained in the note. “This approach, known as the Agency model, protects the value of our authors’ content, while allowing the publisher to change ebook prices dynamically to maximize sales. Importantly, the percent of revenue on which Hachette authors’ ebook royalties are based will not decrease under this agreement.”

    • You may be smart, but you’re not debuting any information here. That the PERCENTAGE share to Hachette authors doesn’t change is a nice way for Pietsch to say that their dollar share WILL change when Hachette chooses to reduce prices! And the point is that Amazon’s percentage share doesn’t change, either, which is, of course, the point to the piece. My agent friends fully understand what is going on.

      • See_Rebel

        And yet David Streitfeld reported in the New York Times that:

        “Hachette won an important victory on Thursday in its battle with Amazon: the ability to set its own prices for e-books, which it sees as critical to its survival. But even as the publisher and retailer announced a negotiated peace after sparring since January, hardly anyone seemed in the mood for celebratory fireworks.”

        Like I said then, “Be careful what you wish for.”

      • Right. That’s how I saw it until I published the post last week that brought forth the new information I wrote about here. We were all wrong. Including you. Because Hachette didn’t really get what they wished for!

      • See_Rebel

        They wanted agency pricing, at least that’s what the NYT reported, and they got agency pricing. They apparently didn’t realize what their pricing strategy would do to market share, revenue and profitability. Now, they want to blame Amazon. They are certainly consistent in that.

      • Amazon changes its policies too. That’s business. I’m just trying to understand what is really going on. Are you?

      • See_Rebel

        I don’t see how anyone could believe that Amazon forced agency pricing on the big publishers. It defies imagination.

      • Well, clearly it defies *your *imagination!

      • See_Rebel

        And *Publishers Weekly’s*:

        “But it is fair to say that Amazon officials likely see the current negotiations as their best chance to push for the end of agency pricing for e-books, and are apparently prepared to bring to bear all the pressure they can on publishers—whether on the Kindle side, or print. The question is, will the major publishers stick together to keep agency pricing for e-books?”

        . . .

        “Of course, if the publishers still believe in a no-discount, straight agency model for e-books, they can keep it. And they have some leverage. Despite the pain of the lawsuits, the 2010 agency switch succeeded in bringing a major new competitor, Apple, into the e-book game. And, the agency model also enjoys support from other retailers who are not eager to return to a permanent price war with Amazon—Barnes & Noble, Kobo, and Google are either happy with agency pricing or at least indifferent to it.”

      • Amazing how wrong a lot of people could be, isn”t it? But those negotiations were private when they took place. Paraphrasing John Maynard Keynes: I got some new information; some new facts. They showed me that what I thought before, informed by sources you now bring back up, was WRONG. So I revised my understanding and my opinion. You are free to continue to be wrong and to continue being misinformed by well-intentioned but mistaken reporting. I choose to admit error when I know it has occurred. And to be willing to learn something new. It’s refreshing. You might try it sometime.

      • See_Rebel

        Occam’s Razor says it is far more likely that the narrative reported by all at the time of the negotiations is far more likely to be accurate than the one being floated around now and reported only by you, after the results have been proven uniformly bad for the publishers.

      • That’s your interpretation of Occam’s Razor. Actually, I think it is more likely that the truth of secretive negotiations comes out over time. I’m getting plenty of private confirmation from people who know that I’m right. We all have to judge the quality of our own sources. And you’ll undoubtedly make your own judgment about what you think are the quality of mine.

  • Nirmala Erway

    As Passive Guy asks on his re-posting of this post, why would Amazon which is obsessive about offering lower prices and does not seem concerned about margins, suddenly care about a guaranteed margin at the cost of higher prices for ebooks? I am not sure this report that Amazon pushed for agency pricing is credible.

    • Why would Amazon be concerned about margins? Put it another way: why would Amazon want to give up margin to help Big Five publishers who are doing everything they can to make things difficult for them? You are welcome to believe whomever you want to believe. And it will cause me absolutely no pain if you choose not to believe me. Vaya con dios.

      • Robotech_Master

        The idea is that Amazon has been obsessive in the past about shaving prices down to the psychological-magic-number price of $9.99, even if they cut into their margin or even lost money to do it, even to the point of ignoring publishers’ increases in wholesale price. I think Nirmala feels it’s a sudden change for Amazon suddenly to demand a 30%+ agency pricing margin.

        I’m not so sure, though. Even after Judge Cote threw out agency pricing, Amazon wasn’t quite so gung-ho about marking everything down to $9.99 anymore. The marketplace had changed since those $9.99 days; Amazon had basically won, and e-readers had gotten a lot cheaper. It doesn’t seem that far-fetched to me that Amazon might decide it now wanted agency pricing.

      • Nirmala Erway

        That would be quite a turnaround, but then Amazon does seem to adapt quickly to changing market conditions. So maybe they are taking a 180 degree turn here.

      • From their position several years ago it is a 180 degree turn. But it was done sort of gradually. First they had to accept higher agency prices. Then the DoJ helped them by allowing them to discount off agency and forcing the publishers to renegotiate their agency deals. That was a process that took a while, over a year altogether. The Hachette standoff alone was many months. During the course of that, the marketplace had changed, Kindle Unlimited had started, and the overall Kindle share had started to move back up. And they were cornering more and more of the successful indies. Amazon is not Bernie Sanders, who takes pride in never having changed a position in 40 years. They’re relentlessly practical. This is a very smart of them. It is ironic. I was thinking the publishers were dumb for not going off agency to wholesale.. That was wrong. They weren’t dumb. It was just that Amazon was too smart to LET them!

      • Nirmala Erway

        Why, if Amazon was pushing for agency, did they publish all of their arguments for the importance of lower ebook prices during the negotiations with Hachette? It seemed during those negotiations that Amazon was still pushing for lower prices, not for fixed margins and publisher control of prices.

      • Why? Because they were negotiating with Hachette! Each negotiation changes things for the subsequent negotiations. And, you’ll recall, they didn’t close first with Hachette. Hachette kept their heels dug in. S&S came to a deal with Amazon before Hachette did.

      • Nirmala Erway

        On reflection, during negotiations with Hachette, Amazon was arguing for lower prices, but not specifically for wholesale pricing. Amazon might have been pushing the publishers to take a much lower cut under agency anytime they priced above $9.99, just as they do for KDP.

        They were not arguing for the right to discount, but for the overall benefits of lower prices. And the math they used to justify their assertion that lower prices were better still showed Amazon receiving 30% on the lower priced ebooks which is consistent with agency pricing.

      • Makes total sense from Amazon’s POV. And consistent with what I heard.

      • I think you’ve described the marketplace changes quite well. Amazon needed the big branded books to be cheap to jump start the whole ebook revolution. But they don’t need that anymore. For the most part, Kindle readers will be Kindle readers and they’ll choose from what’s made available to them, deciding by whatever matrix of author, topic, and price matters at any particular moment. Kindle almost certainly has the biggest selection. What is chosen within that selection might matter very little to Amazon.

      • Nirmala Erway

        I believe you that you heard what you reported. It is just that I doubt it is correct…..but I could be wrong.

      • I believe it both because I believe my sources know what they’re talking about and because it makes so much sense.

      • Nirmala Erway

        It could also be because your source was being misled. Maybe now that the publishers are realizing that agency is not as great as they thought it was, they want to shift the blame onto Amazon. It is easy to make up such a story as part of a revisionist spin when the actual negotiations had to be confidential for obvious reasons.

      • Believe what you want. My source is neither a liar nor is he uninformed. I have additional sources from inside publisher negotiations who are confirming it, now that I have published. This is all clearly in Amazon’s self-interest. I believe they’re smart enough to have come to that conclusion without any help from me. Maybe you don’t.

  • Nirmala Erway

    I do think it is ironic that the higher prices of the big5 publishers’ ebooks may be increasing the percentage of print sales that end up being purchased at Amazon. So much for protecting their relative exclusivity at brick and mortar stores.

  • Steven Zacharius

    As a Company that just switched to agency pricing I don’t think it’s a bad thing. It might not be good for publishers that have left their digital list prices high, which can make them more expensive than the physical book if the physical book is being discounted. I could see this aggravating consumers in trying to figure out how the heck could an ebook cost more than the printed book. But by having consistent pricing across all of the ebook retailers it makes it a level playing field amongst the retailers. Nobody is going to being selling an ebook edition of a hardcover that would normally sell for $28.00 for only $1.99 in digital, unless the publisher specifically wants to do that type of low cost promotion.
    If publishers keep making ebook prices ridiculously low priced it has to hurt the bottom line in the long run. It absolutely devalues the author’s content and it gets consumers used to wanting only to buy discounted books.
    My own opinion is that the discounting ebooks should be used to stimulate sales of a new author or to get readers interested in a specific series by an author.
    With most ebook reading being done on portable devices, like phones or tablets, the dedicated e-reading device might become a dinosaur in the near future. Time will tell quickly.

  • William Ockham

    I think all of you folks are making a few unwarranted assumptions. This is interesting new information. Let’s start with the assumption that everyone is telling the truth as they see it. And let’s assume that big corporations are able to negotiate in their own best interests, even though they may misread the intentions of the other party in the negotiation.

    If Amazon insisted on no-discount agency pricing, does it inevitably follow that the reason was to protect their margin? I don’t think so. Let’s rewind the clock. Go back to the summer of 2014. Amazon and Hachette were in secret negotiations. But the secrecy wasn’t absolute. The Hachette side leaked some details of the sticking points to the New York Times, among other outlets. One part of the leaks made no sense to me at the time. The claim was that the main bone of contention was Amazon trying to raise its cut from 30% to 50%. If Amazon was proposing to return to the status quo ante (i.e. ebooks on the same terms as physical books) and Hachette was proposing the status quo (the misnamed ‘agency lite’) that leak makes sense. We all thought that Hachette wanted to directly control the retail price of its ebooks. In reality, they wanted the 70-30 split at wholesale terms which would indirectly give them that control.

    Amazon balked. I imagine that Amazon may have countered with if you want a 70-30 split and we set retail prices, you can have a deal like KDP. The parties ended up with the deal they have.

    So, sure Amazon forced the big publishers to accept agency because Amazon had enough market power to refuse to a terrible deal. But it wasn’t because Amazon wanted to protect their margin. It was because that was the deal that generated the lowest overall prices for Amazon’s customers. When I say overall, I am including print and ebooks across the board, not just the catalogs of the big publishers.

    • Yeah, could be. And it also could be that the negotiating stance for each negotiation was influenced by the prior one(s). Hachette wasn’t the first to settle; S&S was. And there would be nothing “wrong” with Amazon trying to get what worked best for *them*, and by the time these new agency negotiations were taking place, they didn’t need the pricing advantage on the big branded books to have a commanding market share. They had other elements in play, including a huge indie portfolio and an apparently-thriving subscription offer. What is new information, however you slice it, is that the publishers wanted to go back to wholesale and Amazon wouldn’t let them. And what is important to keep in mind is that Amazon had the *power *to “not let them”.

  • Sandra Hutchison

    What if Amazon is primarily growing its OWN publishing
    imprints by reducing competition from the Big 5? It could forsake some
    immediate profits there in order to build up its own profitable list,
    especially if it has plans to open brick and mortar stores around the
    country eventually. And then, if its list is popular enough, that will
    force regular bookstores and the arbiters of what to read to stop
    shutting them out, since consumers will go elsewhere if they can’t get
    the writers they want to read. And Amazon is already formidable competition as a publisher, with its data and its easy access to new talent.

    • Amazon’s strategy can change all the time, as anybody’s can and should. But they actually stopped focusing on having their publishing go after the Big Five some time ago. They’re much more focused on genre fiction than the tradiest of trade books. You’ll recall that they hired ex-Warner CEO Larry Kirshbaum a few years ago. He was supposed to go after the big commercial books. It proved very hard to sign them, partly because the bookstore boycott was so successful. So Kirshbaum left and their focus has been on category fiction. Cumulatively they have very substantial volume and obviously there are some successful writers in there. But they don’t have a lot of author brands that would compete with the Big Five.

      • Smart Debut Author

        You mean like Snooki? Or PewDiePie?

        Good point.

      • Sandra Hutchison

        Personally I think it’s possible they’ve just gone in a different direction with that effort, compared to that initial frontal assault — partly because of exactly those barriers they faced in the literary marketplace.

      • I think what I said is that they’ve gone in a different direction.